U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended April 30, 1996
Commission File Number
0-20424
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Hi-Tech Pharmacal Co., Inc.
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(Name of small business issuer in its charter)
New York 11-2638720
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
369 Bayview Avenue, Amityville, New York 11701
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(Address of principal executive offices) (Zip Code)
(516) 789-8228
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Issuer's telephone number
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. ( )
The issuer's revenues for its most recent fiscal year ended April 30, 1996 were
$19,140,000.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on July 22, 1996, based upon the price at which such stock was sold on
that date, was $18,408,000. The number of shares of Common Stock of the issuer
outstanding as of July 22, 1996 was 4,475,707.
Transitional Small Business Disclosure Format: Yes ; No X
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PART I
ITEM 1. BUSINESS.
General
Hi-Tech Pharmacal Co., Inc., a New York corporation
incorporated in April 1983, manufactures over 100 generic products in liquid and
semi-solid form, comprised of over-the-counter (non-prescription)
pharmaceuticals, prescription drug products and nutritional preparations,
primarily for the private label market. Private label products are sold under a
retailer's or distributor's own label and these and Company brand products
compete with nationally advertised brand name products. The Company operates
through three primary business divisions: (i) the Company's initial and core
division of generic over-the-counter and prescription liquid and semi-solid
pharmaceuticals; (ii) the Health Care Products division, which successfully
introduced in fiscal 1994 several Company brand name over-the-counter products,
including Diabetic Tussin(R), a liquid cough/cold remedy targeted towards
diabetic customers; and (iii) the Steri-Med division, which began production in
February 1996 of sterile ophthalmic and otic (ear) products in its
state-of-the-art sterile ophthalmic facility. The Company's customers are major
distributors, national and regional retail drug and mass merchandise chains,
mail order companies and drug wholesalers, including Albertsons, American Drug
Stores, Bergen-Brunswig, Eckerds, FoxMeyer, Goldline Laboratories, K-Mart,
Kroger, McKesson, Revco, Rite-Aid, Rugby Laboratories, Schein Pharmaceuticals,
Target, Vons, Walgreens and WalMart. The Company's products include vitamins and
nutritional supplements, cough and cold remedies, decongestants, analgesics,
suppositories and antacids. The Company manufactures its over-the-counter and
prescription drug products in liquid and semi-solid (creams, ointments,
suppositories and gels) dosage forms.
Products
The Company currently markets in excess of 100 generic
products to approximately 200 customers. For the fiscal year ended April 30,
1996 the Company's sales were approximately 71% for the private label market,
approximately 16% for the brand name H-T(TM) and approximately 13% through
Company brand name under its Health Care Products division. Steri-Med began
shipping products in the spring of 1996 and markets through private label
customers and under brand names. Approximately 5% of the Company's revenues for
the fiscal year ended April 30, 1996 were from the sale of one generic
prescription drug product. The Company is currently engaged in contract
manufacturing for various customers of various products to meet customer
specifications.
The Company manufactures most of the products in its generic
drug line under its own brand name. Sales of the Company's own brand name
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products, H-T(TM),Sooth-it(R), Diabeti Derm(TM) and Diabetic Tussin(R),
accounted for approximately 29% of the Company's revenues for the fiscal year
ended April 30, 1996.
The Company's Health Care Products division is currently
marketing over-the-counter products under various brands, including Diabetic
Tussin(R), a cough/cold remedy, a Diabetic Tussin(R) formulation for allergy
relief, a Diabetic Tussin(R) formulation for children's cough
suppressant/expectorant, Diabeti Derm(TM) Moisturizing Cream, a moisturizing
skin cream, which are targeted to the diabetic market and Sooth-it(R),
hemorrhoidal pads, and Diabetic Sweet(TM), a sugar substitute. Sales of the
Health Care Products division accounted for approximately 13% of the Company's
revenues for the fiscal year ended April 30, 1996. The Company introduced three
new products, Diabetic Tussin(R) Cough Drops in both menthol and cherry flavors
and Diabetic Tussin(R) Maximum Strength Cough Syrup and Diabetic Sweet(R), a
sugar substitute, in fiscal 1996.
The Company's Steri-Med Division has completed the validation
process of the sterile facility and has entered into contract manufacturing
agreements for the manufacture of sterile products in the facility. The Company
introduced two over-the-counter products consisting of eye drops and eye wash in
fiscal 1996. In the first half of fiscal 1997, the Company anticipates the
introduction of eight additional sterile over-the-counter and prescription items
in the next several months which do not require prior approval from the Food and
Drug Administration, including artificial tears as well as a lubricating
ointment and several prescription products for the treatment of glaucoma.
The Company used the ANDA procedure to obtain FDA approval for
the manufacture of six new products in fiscal 1996. In fiscal 1996, the Company
received FDA approval of ANDAs for Loperamide HCL, a generic equivalent of
Imodium A-D(R), used in the treatment of diarrhea; and Acetaminophen and Codeine
Phosphate Oral Solution, the generic form of Tylenol(R) with Codeine, used for
the relief of pain. In July 1995, the Company received FDA approval of ANDAs for
Lidocaine 2% Solution USP, a topical anesthetic, the generic equivalent of Astra
Pharmaceuticals' Xylocaine 2%, and two forms of Lactulose Solution USP, the
generic equivalents of Chronulac(R) and Cephulac(R), both manufactured by Marion
Merrell Dow Inc. and used in the treatment of chronic constipation.
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The following table sets forth the principal products marketed
by the Company under private label brands and where meaningful, the names of
certain of the national brands with which these products compete. All of the
products listed below are also marketed under the Company's brand name, H-T(TM).
The Company's other trademarks are Sooth-it(R), Diabetic Tussin(R), Diabetic
Sweet(R), and Diabeti Derm(TM).
Examples of Competing
Company Product National Products
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Over-the-Counter Pharmaceuticals
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Cough/Cold/Decongestant
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Bromtapp Elixir Dimetapp(R)Elixir
Diphenhydramine HCL Cough Syrup* Benylin(R)Cough Syrup
Guaiatussin-DM Robitussin(R)DM
Tri-Fedrine Syrup Triaminic(R)Syrup
Tri-Fedrine Expectorant Triaminic(R)Expectorant
Nite-Time Cough Medicine Nyquil(R)
Children's Allergy Medicine Benadryl(R)Elixir
Active Syrup Actifed(R)Syrup
Oxymetazoline Nasal Spray Afrin(R)Nasal Spray
Chlor-Al Allergy Syrup Chlortrimeton(R)Allergy Syrup
Health Care Products
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Diabetic Tussin(R)-Formula DM
Diabetic Tussin(R)-Formula EX
Diabetic Tussin(R) Allergy Relief Formula
Diabetic Tussin(R) Children's Formula
Diabeti Derm(TM) Moisturizing Lotion for
Severe Dry Skin
Diabeti Derm(TM) Moisturizing Cream for
Severe Dry Skin
Vitamins and Nutritional Supplements
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Poly-Vitamin Drops Poly-Vi-Sol(R) Drops
Poly-Vitamin Drops with Iron Poly-Vi-Sol(R) with Iron
Golden Age Liquid Vitamins & Minerals Centrum(R) Liquid
Ferrous Sulfate Solution Drops Fer-in-Sol(R) Drops
Dalyvite Syrup Vi-daylin(R) Syrup
Analgesics
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Apap Drops Tylenol(R) Drops
Apap Elixir Tylenol(R) Elixir
Antacids
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Equalizer Gas Relief Drops Mylicon(R) Drops
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* ANDA approved pharmaceutical product
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Examples of Competing
Company Product National Products
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K-Pec with Attapulgite Kaopectate(R)
Bismuth Liquid Pepto-Bismol(R)
Other Products
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Ache-Eze Mineral Ice Mineral Ice(R)
Calhist Caladryl(R)
Calhist Clear Caladryl Clear(R)
Sooth-it(R) Hygienic Pre-Moistened
Cleansing Pads Tucks(R)Pads
Sooth-it(R)Medicated Cleansing Pads -
Glycerin Adult and Infant Laxative
Suppositories Squibb Glycerin Suppositories
Bisacodyl Dulcolax
AnuRx Suppositories and Ointment Anusol
AnuRx HC Suppositories and Ointment Anusol - HC
RectoRx Suppositories and Ointment Preparation H
Menthyl Salicylate Cream and Ointment Ben-Gay
Menthol & Aloe Gel Flex-All
Maximum Strength Gel Flex-All
Odorless Liniment Aspercreme
Nonoxynol-9 Suppositories Semicid
Nonoxynol-9 Gel Gynol II
Oil of Rose Lotion Oil of Olay
Oil of Rose Cream Oil of Olay
Hydrocortisone 1% Cortisone 10
Prescription Drugs
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Cough/Cold/Decongestants
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Carbofed-DM Syrup & Drops Rondec(R)-DM Syrup & Drops
Nalphen Pediatric Drops & Syrup Naldecon(R) Pediatric Drops & Syrup
Quad-Tuss Tannate Pediatric Suspension Rynatuss(R) Pediatric Suspension
Triple Tannate Pediatric Suspension Rynatan(R) Pediatric Suspension
Triple Tannate-S Pediatric Suspension Rynatan(R)-S Pediatric Suspension
Vitamins
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Poly-Vitamin Drops with Iron &
Fluoride 0.25 Poly-Vi-Flor(R) w/Iron
Poly-Vitamin Drops with Fluoride
(0.25)(0.5) Poly-Vi-Flor(R)
Tri-Vitamin Drops with Fl(.25)(.5) Tri-Vi-Flor(R)
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* ANDA approved pharmaceutical product
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Examples of Competing
Company Product National Products
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Other Products
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Hyco Drops Levsin(R)Drops
Hyco Elixir Levsin(R)Elixir
Valproic Acid Syrup USP* Depakene(R)Syrup
Hydroxyzine Hydrochloride Syrup USP* Atarax(R)
Amantadine Hydrochloride Syrup* Symmetrel(R)Syrup
Lidocaine 2% Solution USP* Xylocaine(R)2%
Lactulose Solution USP* Chronulac(R), Cephulac(R)
Loperamide HCL* Imodium A-D(R)
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* ANDA approved pharmaceutical product
Research and Product Development
The Company's primary product development strategy emphasizes
developing, manufacturing and marketing generic drugs which are equivalent to
nationally advertised brand name products which have developed a large market
acceptance and national branded products under its Health Care Products
division. The Company also manufactures and markets generic products for niche
markets. Although certain niche markets may be too small and, therefore,
uneconomical for large pharmaceutical companies, such markets sometimes present
valuable opportunities for the Company.
The Company's research and development activities consist
primarily of new generic drug product development efforts and manufacturing
process improvements. New product activities are primarily directed at
conducting research studies to develop generic drug formulations, reviewing and
testing such formulations for therapeutic equivalence to brand name products and
development of brand name products for its Health Care Products division and its
Steri-Med division. For the fiscal years ended April 30, 1996 and 1995, total
research and development expenditures were $933,000 and $711,000, respectively.
Certain of these product development strategies depend, in
part, upon the Company's ability to formulate and develop generic drug products
equivalent to brand name drugs for which, in some cases, patent protection is
expiring and to obtain FDA approval using the ANDA procedure for the manufacture
and sale of such products. In July 1995, the Company used the ANDA procedure to
obtain FDA approval for the manufacture of Lidocaine 2% Solution USP, a topical
anesthetic, the generic equivalent of Astra Pharmaceuticals' Xylocaine 2%, and
two forms of Lactulose Solution USP, the generic equivalents of Chronulac(R) and
Cephulac(R), both manufactured by Marion Merrell Dow Inc. and used in the
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treatment of chronic constipation. In November 1995, the Company received FDA
approval of an ANDA for Loperamide HCL, the generic equivalent of McNeil's
Consumer Products Companys' Imodium A-D(R), which is used in the treatment of
diarrhea. In addition, in April 1996, the Company received FDA approval of
Acetaminophen and Codeine Phosphate Oral Solution, the generic equivalent of
McNeil's Consumer Products Company's Tylenol(R) with Codeine, used for the
relief of pain. Loperamide HCL, Lidocaine 2% Solution USP, Acetaminophen and
Codeine Phosphate Oral Solution should be available for shipment in the second
quarter of fiscal 1997.
The completion of a prospective product's formulation, testing
and FDA approval generally takes several years. Development activities for each
generic product could begin several years in advance of the patent expiration
date, which may include bioequivalency studies which are a significant cost of
such ANDA submissions. Consequently, the Company is presently selecting and will
continue to select and develop drugs it expects to market several years in the
future.
The Company has obtained approval of the DEA to sell certain
generic pharmaceutical products containing narcotics. The Company is currently
manufacturing six preparations containing codeine. In order to manufacture and
sell products containing narcotics, the Company has implemented stringent
security precautions to insure that the narcotics are accounted for and properly
stored. These products do not require prior FDA approval. The Company commenced
the manufacture and marketing of such products during the second quarter of
fiscal 1994. The Company has filed ANDAs for products which contain codeine.
The Company's Steri-Med Division is currently selecting and
developing ophthalmic and otic products to be manufactured in its sterile
manufacturing facility. The Company has completed the validation process of its
sterile facility, adjacent to its current facility for, among other things, the
manufacture of generic ophthalmic and otic products and certain other products
which require a sterile manufacturing environment. The manufacture of ophthalmic
and otic products requires a sterile environment, validation of the
manufacturing process and special equipment and trained personnel. The Company
has executed contract manufacturing agreements to develop and manufacture ANDA
and generic pharmaceutical products in its sterile facility and commenced
production, marketing and shipping sterile products in February, 1996. The
Company produced two products in its sterile facility for private and controlled
labels. The Company intends to use the ANDA procedure to obtain FDA approval for
the manufacture of certain other products. The Company currently manufactures
over-the-counter eye drops and eye wash and plans to introduce artificial tears
as well as a lubricating ointment and various prescription products for the
treatment of glaucoma.
The Company and Circa Pharmaceuticals, Inc. ("Circa") are
developing and will jointly market four generic prescription solutions following
FDA approval of ANDAs for such products, two of which have been submitted to the
FDA by the Company. Circa will contribute $1.2 million to the development costs
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of such products as the Company achieves certain developmental and regulatory
milestones, and the Company will retain exclusive manufacturing rights for such
products. The Company and Circa will each market and distribute the products
under their own brand names and for private label and share equally in the
marketing profits.
The Company's Rose Laboratories Division extends the Company's
product line to include suppositories, creams and ointments and strengthens its
product development programs. Rose manufactures generic equivalents of products,
such as Squibb's Glycerine Suppositories, American Home Products' Preparation H
Suppositories and Creams, Parke Davis' Anusol, Thompson Medical's Cortisone 10
and CIBA Consumer Products' Dulcolax Suppositories. Rose's sales in fiscal 1996
were approximately $1,250,000.
Customers and Marketing
The Company markets its products primarily to private label
distributors, drug store chains, mass merchandisers, drug wholesalers, mail
order distributors and local, state and Federal government agencies. The Company
sells its generic products to over 200 active accounts located throughout the
United States. For the fiscal year ended April 30, 1996, two customers, Rugby
Laboratories and Goldline Laboratories, accounted for approximately 21% and 16%,
respectively, of the Company's sales. For the fiscal year ended April 30, 1995,
Rugby Laboratories and Goldline Laboratories accounted for approximately 23% and
10%, respectively, of the Company's sales. Each of the Company's other major
customers accounted for less than 10% of the Company's total revenues for such
periods. The Company's top ten customers accounted for approximately 60% and 59%
of the Company's total sales for each of the fiscal years ended April 30, 1996
and 1995, respectively. If any of the Company's top five customers discontinues
or substantially reduces its purchases from the Company, it could have a
material adverse effect on the Company's business and financial condition, or if
any other of the Company's major customers discontinues or substantially reduces
its purchases from the Company, it may have a material adverse effect on the
Company's business and financial condition. The Company believes, however, that
it has good relationships with its customers.
The Company also markets substantially all of its products
under its H-T(TM) brand name. The Health Care Products division sells and
markets its products under the Company's brand names. For the fiscal year ended
April 30, 1996, the products sold under the H-T(TM) brand name and under the
Health Care Products division accounted for approximately 16% and 13% of the
Company's total sales.
The Company utilizes its state of the art facility and
laboratories to offer contract manufacturing capabilities to its customers, as
well as research and development programs.
The Company's Health Care Products division, created in fiscal
1993, utilizes national brand marketing methods to market the Company's current
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and new brand name products. This division is marketing Sooth-it(R),
hemorrhoidal pads, Diabetic Tussin(R), a liquid cough/cold remedy, Diabetic
Tussin(R) Maximum Strength Cough Syrup, a cough syrup, Diabetic Tussin(R) Cough
Drops, both in menthol and cherry flavors, Diabeti Derm(TM) Moisturizing Cream,
a skin cream, Diabeti Derm(TM) Moisturizing Lotion, a skin lotion, and Diabeti
Sweet(R), a sugar substitute, all of which are targeted to the diabetic market.
Products sold through the Health Care Products division accounted for
approximately 13% and 11% of the Company's total sales for fiscal 1996 and
fiscal 1995. The Company markets such products by, among other things, more
contemporary packaging to improve point-of-purchase impact, media, trade and
consumer journal advertising to increase consumer appeal, as well as extensive
price, display, packaging, bonus, multi-pak and coupon promotions. The Company
intends to expand its marketing strategy with programs to include marketing
ventures with major companies selling popular prescription medications, pharmacy
programs and through the internet using a website. All marketing and sales
efforts are conducted by Company employees and 12 independent commission sales
representatives.
Manufacturing
The Company's manufacturing capabilities are designed to be
flexible in order to allow the low cost production of a variety of products of
different dosages, sizes, packagings and quantities while maintaining a high
level of quality and customer service. This flexible production capability
allows the Company to change on-line production to allow for different size
production runs and to allow the Company to respond quickly to changes in
customer needs. During fiscal 1996, the Company installed an additional high
speed liquid filling line for a total of five liquid filling lines for its
non-sterile operations, enabling the Company to meet the increasing demands of
its customers while improving overall packaging efficiencies.
In July 1993 the Company expanded its existing facility by
approximately 20,000 square feet, primarily to expand its production capacity.
In September 1992, the Company purchased and renovated an approximately 21,500
square feet adjacent facility, which is being used primarily as a sterile
facility for the manufacture of generic ophthalmic and otic products. Such
renovation was completed in the last quarter of fiscal 1994. In the first
quarter of fiscal 1995, the Company manufactured trial runs of sterile
ophthalmic and otic products. In the fourth quarter of fiscal 1996, the Company
began manufacturing for shipment sterile ophthalmic and otic products. In
addition, in February 1994, the Company purchased a building in Amityville, New
York of approximately 21,000 square feet which is used primarily for warehouse
space. In November 1994, in connection with the Company's acquisition of Rose,
the Company leased the facility in Madison, Connecticut previously used by Rose
for the manufacture of suppositories and other products. The Company intends to
consolidate the operations of the Rose Laboratories Division into its facilities
in Amityville, New York in the fall of 1996. The Company will be seeking
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additional warehouse space to accommodate the Rose Laboratories Division as well
as its Steri- Med Division.
The Company's raw materials are readily available from
multiple suppliers, and the Company is not dependent upon any single supplier
for its needs. The Company has good, cooperative working relationships with its
suppliers and has not experienced any difficulty in obtaining its raw materials.
If a supplier were unable to supply the Company, the Company believes it could
locate an alternative supplier. However, any change in suppliers of a raw
material could cause significant delays in the manufacture of such product.
Although many of the products currently manufactured and
marketed by the Company do not require prior specific product FDA approval,
certain products which the Company intends to introduce under its product
development program are subject to the ANDA process which requires the raw
material suppliers of a product to be listed in the ANDA. If raw materials from
a specified supplier were to become unavailable, FDA approval of a new supplier
would be required. Even if the new supplier is qualified by the FDA and its
manufacturing process meets FDA standards, approval of a new supplier could
cause delays in the manufacture of the drug involved.
Competition
The market for generic private label pharmaceuticals is highly
competitive. The Company's direct competition consists of numerous generic drug
manufacturers, many of which have greater financial and other resources than the
Company. If one or more other generic pharmaceutical manufacturers significantly
reduce their prices in an effort to gain market share, the Company's
profitability or market position could be adversely affected. Competition is
based principally on price, quality of products, customer service, reputation
and marketing support.
The Company's products also compete with those of companies
marketing nationally advertised brand name products. Many of the national brand
companies have resources substantially greater than those of the Company. These
national brand manufacturers compete from time to time with generic
pharmaceutical manufacturers and some have acquired generic pharmaceutical
manufacturers which compete more directly with the Company by manufacturing
private label products.
Since entering the sterile ophthalmic and otic market, the
Company has been competing with companies marketing nationally advertised
ophthalmic and otic brand name and generic products. Many of the national brand
companies and some of the generic manufacturers have resources substantially
greater than those of the Company. Competition is based principally on price,
quality and customer service.
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Government Regulation
The Company's products and facilities are subject to
regulation by a number of Federal and state governmental agencies. The FDA, in
particular, maintains oversight of the formulation, manufacture, distribution,
packaging and labeling of all of the Company's products. The Company believes
that its products comply in all material respects with existing regulations.
The FDA has promulgated regulations known as "Current Good
Manufacturing Practice for Finished Pharmaceuticals" which govern the drug
manufacturing operations of the Company's facility. These practices include
strict quality control standards at all stages of production, including the
receipt of raw materials, storage, manufacturing and labeling. Pursuant to these
practices, raw materials are sampled and tested in the Company's laboratory
facilities, products are sampled and tested during production and quality levels
are continuously monitored. In addition, sanitation and other standards
applicable to the Company's non-drug products (including vitamins) are regulated
pursuant to the Federal Food, Drug, and Cosmetics Act of 1938, as amended.
Although most of the products currently manufactured and
marketed by the Company do not require prior specific approval of the FDA,
certain products which the Company intends to introduce under its product
development program will require prior FDA approval using the ANDA procedure
before they can be marketed. The Company currently has submitted for FDA
approval nineteen generic formulations. The Company received, as of July 1996,
through the ANDA procedure, approval for six products. Such products are
Lidocaine 2% Solution USP, a topical anesthetic, the generic equivalent of
Xylocaine(R) 2% USP, manufactured by Astra Pharmaceuticals; two forms of
Lactulose Solution USP, the generic equivalents of Chronulac(R) and Cephulac(R),
both manufactured by Marion Merrell Dow Inc., which are used in the treatment of
chronic constipation; Loperamide HCL, generic equivalent of Imodium A-D(R),
manufactured by McNeil's Consumer Products Company, which is used in the
treatment of diarrhea; and Acetaminophen and Codeine Phosphate Oral Solution,
the generic equivalent of Tylenol(R) with Codeine, manufactured by McNeil's
Consumer Products Company which is used for the relief of pain. In general, an
ANDA can be filed for a drug which is the equivalent of a product previously
approved by the FDA. Under the ANDA procedure, applicants are required to
demonstrate through studies that, among other things, the drug product is
chemically equivalent to the previously approved drug, that its facilities and
personnel meet FDA standards for the manufacture of such product, and that its
production procedures will consistently adhere to FDA quality standards, and, in
certain cases, the applicant is required to demonstrate the bioequivalency of
its product (the rate and extent of absorption of a drug's active ingredient
and/or its availability at the site of drug action). Use of the ANDA procedure
substantially reduces the expense of securing FDA approval and may reduce the
time for approval from five years or more for a New Drug Application to two to
four years for an ANDA.
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The FDA has extensive enforcement powers, including the power
to seize noncomplying products, to seek court action to prohibit their sale and
to seek criminal penalties for noncomplying manufacturers. Although it has no
statutory power to force the recall of products, the FDA usually accomplishes a
recall as a result of the threat of judicially imposed seizure, injunction
and/or criminal penalties.
The Company believes that it is in substantial compliance with
the FDA's Good Manufacturing Practices.
The Company is also subject to regulation by the DEA, which
regulates the sale of pharmaceutical products that contain narcotics. The
Company has received DEA approval and is manufacturing and selling six cough
syrup products containing codeine. The DEA also has extensive enforcement
powers, including the power to seize and prohibit the manufacture and sale of
noncomplying products. The narcotic products which the Company presently
manufactures and markets do not require specific FDA approval.
Product Liability
The sale of pharmaceutical products can expose the
manufacturer of such products to product liability claims by consumers. A
product liability claim, if successful and in excess of the Company's insurance
coverage, could have a material adverse effect on the Company's financial
condition. No product liability suit has ever been filed against the Company.
The Company maintains a product liability insurance policy which provides
coverage in the amount of $5,000,000 per claim and in the aggregate, with a
$100,000 deductible.
Employees
As of April 30, 1996, the Company employed 126 full-time and
12 part-time persons, of whom 18 were engaged in executive, financial and
administrative capacities; 3 in marketing, sales and service; 63 full-time and
12 part-time employees in production, warehousing and distribution; and 42 in
research and development and quality control functions. The Company is not a
party to a collective bargaining agreement. The management of the Company
considers its relations with its employees to be satisfactory.
ITEM 2. PROPERTIES.
The Company's executive offices and manufacturing facility are
located in Amityville, New York. The Company currently occupies such facility,
aggregating approximately 38,000 square feet. The Company purchased this
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facility and leasehold improvements thereon from its principal shareholders for
a purchase price of $900,000 on July 29, 1993. There is a first mortgage on the
property in the original principal amount of $922,500. The Company also owns a
facility in Amityville, New York of approximately 21,500 square feet, which is
used as a sterile manufacturing facility and also contains research and
development, chemistry and microbiology laboratories. There is a first mortgage
on the property in the original principal amount of $600,000.
The Company also owns a 21,000 square foot warehouse facility
in Amityville, New York which it purchased in February 1994 for a purchase price
of $500,000. There is a first mortgage on the property in the amount of
$375,000. The Company's three facilities in Amityville, New York total
approximately 80,000 square feet.
The Company leases an approximately 17,000 square foot
facility in Madison, Connecticut under a month-to-month lease. The current
annual base rate for such premises is $48,000. The landlord of such facility is
comprised of the former principal shareholders of Rose. Such facility was
formerly used by Rose's predecessor company.
The Company believes that its properties are adequately
covered by insurance and are suitable and adequate for their present needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to an action commenced in November 1994
in the Supreme Court, State of California, in which the plaintiff, an investor
who purchased various securities through a broker-defendant, alleges, among
other things, that the Company and Bernard Seltzer advised the broker-defendant
of certain non-public information concerning the Company which the plaintiff
relied upon to purchase securities of the Company, which securities subsequently
diminished in value. Management of the Company believes that this action is
without merit and it has meritorious defenses to this action. On April 11, 1996,
the court quashed the summons and complaint with respect to Bernard Seltzer,
individually. The Company was served, filed an answer and
certain motions and has notified its insurance carrier.
The Company is not a party to any other material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during
the quarter ended April 30, 1996.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK.
Market Information
The following table sets forth the high and low sales prices
for the Company's common stock for the periods indicated, as reported by Nasdaq,
adjusted to reflect the three-for-two stock split effective November 1, 1993.
The quotations are inter-dealer prices, without retail mark-up, mark-down or
commissions paid, and may not necessarily reflect actual transactions.
Quarter Ended High Low
----------------------- --------------- ------------
Fiscal 1995
-----------
July 31, 1994 11.87 8.25
October 31, 1994 8.62 6.06
January 31, 1995 6.75 5.00
April 30, 1995 6.75 4.25
Fiscal 1996
-----------
July 31, 1995 8.13 4.75
October 31, 1995 9.38 6.75
January 31, 1996 8.75 6.63
April 30, 1996 9.63 7.63
Common Stock Holders
The Company believes there are approximately 1,133 holders of
Common Stock, including shares held in street name by brokers.
Dividends
The Company has never declared or paid any cash dividends, and
it does not anticipate that it will pay cash dividends in the foreseeable
future. The declaration of dividends by the Company in the future is subject to
the sole discretion of the Company's Board of Directors and will depend upon the
operating results, capital requirements and financial position of the Company,
general economic conditions and other pertinent conditions or restrictions
relating to any financing. The Company's current loan agreement prohibits the
payment of cash dividends by the Company.
14
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General
The following discussion and analysis should be read in
conjunction with the Financial Statements and Notes thereto appearing elsewhere
in this Report.
The following table sets forth, for all periods indicated, the
percentage relationship that items in the Company's Statements of Operations
bear to net sales.
Year Ended April 30,
------------------------------
1996 1995
-------------- --------------
Net Sales 100.0% 100.0%
Cost of Sales 61.6% 59.1%
-------------- --------------
Gross profit 38.4% 40.9%
Selling,
general & administrative expense 24.0% 20.8%
Research & development costs 4.9% 4.3%
Contract research (income) (2.4%) (1.8)%
Interest expense 0.8% 1.0%
Interest (income) and other (0.4)% (0.5)%
-------------- --------------
Total expenses 26.9% 23.8%
Income before tax provision 11.5% 17.1%
Income tax provision 4.5% 6.5%
-------------- --------------
Net income 7.0% 10.6%
============== ==============
Results of Operations
Years Ended April 30, 1996 and 1995
For the fiscal year ended April 30, 1996 ("Fiscal 1996"), net sales increased by
$2,734,000, or 16.7% to $19,140,000 from $16,406,000 for the fiscal year ended
April 30, 1995 ("Fiscal 1995"). The increase was primarily the result of the
introduction of new products, greater distribution of existing products, and
market penetration of a broader product line in Fiscal 1996 to a broader
customer base. Sales, however, did not meet management's expectations due to a
15
<PAGE>
mild flu season which caused less demand for cough and cold products. Of the
$2,734,000 increase in sales, approximately $672,000 was from the Health Care
Products Division and $709,000 was from the Company's Rose Laboratories
subsidiary.
Cost of sales, as a percentage of net sales, increased form 59.1% for Fiscal
1995 to 61.6% for Fiscal 1996. This was a result of increased labor and overhead
costs such as: Depreciation $184,000; Factory supplies and expense $181,000;
Utilities $84,000. These increases were principally the result of the start-up
of the Company's sterile facility. In the aggregate, labor and overhead
increased 29% while net sales increased 17%.
Selling expenses increased 58% and general and administrative expenses increased
26% while general and administrative wages increased 16%. In the aggregate, such
expenses increased to $4,601,000 for Fiscal 1996 from $3,419,000 for Fiscal 1995
and as a percentage of net sales increased from 20.8% to 24.0%. This was
primarily the result of a mild flu season which caused less demand for cough and
cold products.
Research and development costs increased to $933,000 or 4.9% of sales for Fiscal
1996 from $711,000 or 4.3% of sales for Fiscal 1995 as a result of, among other
things, expenses associated with the filing of Abbreviated New Drug Applications
(ANDAs) with the FDA. The majority of the Company's pharmaceutical products do
not require prior approval before marketing. However, certain products which the
Company introduced and intends to introduce under its product development
program will require prior FDA approval using the ANDA procedure before they can
be manufactured and marketed. Such products include products to be manufactured
on the Company's sterile facility. There can be no assurance that the FDA will
approve such products or, if approved, when such approval will be received.
Net income decreased to $1,335,000 for Fiscal 1996 from net income of $1,731,000
for Fiscal 1995, as a result of expenses associated with the introduction of new
products and greater distribution. In addition, net sales did not meet
management's expectations due to a mild flu season which caused less demand for
cough and cold products. Additional expenses were incurred as a result of the
start-up of the sterile facility.
Liquidity and Capital Resources
The Company's operations are historically financed principally by cash flow from
operations and bank borrowings. At April 30, 1996 and April 30, 1995, working
capital was approximately $5,164,000 and $4,241,000, respectively.
Accounts payable increased 23% from $1,842,000 for Fiscal 1995 to $2,269,000 for
Fiscal 1996 principally as a result of the increased levels of business
activity.
16
<PAGE>
Accrued expenses increased 19% from $606,000 for Fiscal 1995 to $723,000 for
Fiscal 1996 as a result of the increased levels of business activity.
Cash flows from operating activities were approximately $1,099,000, which was
the result principally of net income of $1,335,000. Cash flows form investing
activities consumed approximately $1,079,000 from operating activities funds and
was comprised of payments for fixed assets acquired. Cash flows used for
financing activities approximated $55,000 and resulted principally from proceeds
of $570,000 from common stock issued from the exercise of stock warrants and the
retirement of $605,000 of debt.
The Company has constructed a sterile manufacturing facility for the purpose of
manufacturing ophthalmic and otic products. This facility and the required
systems and procedures were completed in the last three months of Fiscal 1996.
Although the Company has not previously manufactured sterile products, the
Company believes that it will be able to operate this facility profitably over
the long term. However, the Company will incur additional expense over the
initial start-up period.
The Company has a working capital credit line of $2,000,000 which expires August
31, 1996 and is expected to be renewed. The outstanding balance was $815,000 at
April 30, 1996. Borrowings under the line are limited to 80% of eligible
receivables and are collateralized by the assets of the Company. The loan
agreement contains certain financial ratio and other covenants and prohibits the
payment of cash dividends.
The Company believes that its financial resources consisting of anticipated
future operating revenue and its existing credit line will be sufficient to
enable it to meet its working capital requirements for at least the next 12
months.
17
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
INDEX PAGE NUMBER
- --------------------------------------------------------- -----------
Report of Independent Auditors............................ 19
Consolidated Balance Sheets............................... 20
Consolidated Statements of Operations..................... 21
Consolidated Statements of Cash Flows..................... 22
Consolidated Statements of Changes in Stockholders' Equity 23
Notes to Consolidated Financial Statements................ 24
Selected Financial Data................................... 35
18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors &
Stockholders
Hi-Tech Pharmacal Co., Inc.
Amityville, New York
We have audited the accompanying consolidated balance sheets of Hi-Tech
Pharmacal Co., Inc. and subsidiary as at April 30, 1996 and April 30, 1995, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the financial position of Hi-Tech
Pharmacal Co., Inc. and subsidiary at April 30, 1996 and April 30, 1995 and the
results of their operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
S/RICHARD A. EISNER & COMPANY, LLP
- ---------------------------------
RICHARD A. EISNER & COMPANY, LLP
New York, New York
July 11, 1996
19
<PAGE>
<TABLE>
<CAPTION>
HI-TECH PHARMACAL CO., INC.
CONSOLIDATED BALANCE SHEETS
April 30,
-------------------------------------------------------------
1996 1995
--------------------------- ---------------------------
A S S E T S (Notes F and G)
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note A[7]) ....................... $ 1,746,000 $ 1,781,000
Accounts receivable (less allowances for doubtful accounts of
$160,000 and $145,000 at April 30, 1996 and April 30, 1995) 3,699,000 3,218,000
Inventory (Notes A[3] and C)................................. 3,646,000 2,841,000
Income taxes receivable (Notes A[5] and K)................... 207,000 127,000
Other current assets ........................................ 272,000 262,000
--------------------------- ---------------------------
Total current assets......................................... 9,570,000 8,229,000
Property and equipment at cost, net of accumulated depreciation
and amortization (Notes A[4], and D)......................... 10,598,000 10,113,000
Other assets................................................. 66,000 62,000
--------------------------- ---------------------------
T O T A L ................................................... $20,234,000 $18,404,000
=========================== ===========================
L I A B I L I T I E S
Current liabilities:
Note payable - bank (Note F) ................................ $ 815,000 $ 815,000
Current portion of long-term debt (Note G)................... 599,000 625,000
Accounts payable............................................. 2,269,000 1,842,000
Accrued expenses............................................. 723,000 606,000
Customer deposit (Note A[6])................................. - 100,000
--------------------------- ---------------------------
Total current liabilities.................................... 4,406,000 3,988,000
Long-term debt (less current portion) (Note G) .............. 2,427,000 3,026,000
Deferred taxes (Note K) ..................................... 230,000 124,000
--------------------------- ---------------------------
Total liabilities ........................................... 7,063,000 7,138,000
--------------------------- ---------------------------
Commitments and contingencies (Notes H and I)
STOCKHOLDERS' EQUITY (Note L)
Preferred stock, par value $.01 per share; authorized
3,000,000 shares, none issued................................ - -
Common stock - $.01 par value; 10,000,000 shares authorized,
4,472,000, and 4,348,000 shares issued and outstanding at
April 30, 1996 and April 30, 1995............................ 45,000 43,000
Additional paid-in capital................................... 8,591,000 8,023,000
Retained earnings ........................................... 4,535,000 3,200,000
--------------------------- ---------------------------
Total stockholders' equity................................... 13,171,000 11,266,000
--------------------------- ---------------------------
T O T A L.................................................... $20,234,000 $18,404,000
=========================== ===========================
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
20
<PAGE>
HI-TECH PHARMACAL CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended April 30,
----------------------------------------------
1996 1995
--------------------- ---------------------
<S> <C> <C>
Net sales (Notes A[6] and M)........................ $19,140,000 $16,406,000
Cost of goods sold.................................. 11,785,000 9,691,000
--------------------- ---------------------
Gross profit........................................ 7,355,000 6,715,000
--------------------- ---------------------
Selling, general and administrative expense......... 4,601,000 3,419,000
Research & product development costs................ 933,000 711,000
Contract research (income) (Notes A[6] and E)....... (467,000) (293,000)
Interest expense.................................... 149,000 157,000
Interest (income) and other......................... (67,000) (82,000)
--------------------- ---------------------
T o t a l........................................... 5,149,000 3,912,000
--------------------- ---------------------
Income before income taxes.......................... 2,206,000 2,803,000
Provision for income taxes (Notes A[5] and K)....... 871,000 1,072,000
--------------------- ---------------------
NET INCOME ......................................... $ 1,335,000 $ 1,731,000
===================== =====================
Net income per common share (Note A[8])............. $ 0.29 $ 0.38
===================== =====================
Weighted average number of shares
outstanding......................................... $ 4,664,000 $ 4,579,000
===================== =====================
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
21
<PAGE>
<TABLE>
<CAPTION>
HI-TECH PHARMACAL CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended April 30,
--------------------------------------------
1996 1995
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 1,335,000 $ 1,731,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . 841,000 666,000
Deferred income taxes. . . . . . . . . . . . . . . . . 106,000 774,000
Capitalized interest . . . . . . . . . . . . . . . . . (247,000) (200,000)
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . (481,000) (1,289,000)
Inventory. . . . . . . . . . . . . . . . . . . . . . (805,000) (305,000)
Other current assets . . . . . . . . . . . . . . . . (10,000) 85,000
Other assets . . . . . . . . . . . . . . . . . . . . (4,000) 20,000
Accounts payable . . . . . . . . . . . . . . . . . . 427,000 (520,000)
Customer deposit . . . . . . . . . . . . . . . . . . (100,000) 100,000
Accrued expenses . . . . . . . . . . . . . . . . . . 117,000 33,000
Taxes payable. . . . . . . . . . . . . . . . . . . . (80,000) 169,000
-------------------- --------------------
Net cash provided by operating activities. . . . . 1,099,000 1,264,000
-------------------- --------------------
Cash flows from investing activities:
Loans to officers (Note H) . . . . . . . . . . . . - (817,000)
Payment for acquisition, net of cash received $7,000 . . . - (52,000)
Payment for fixed assets . . . . . . . . . . . . . . . . . (1,079,000) (1,071,000)
-------------------- --------------------
Net cash (used in) investing activities. (1,079,000) (1,940,000)
-------------------- --------------------
Cash flows from financing activities:
Proceeds - long-term debt. . . . . . . . . . . . . . . . . 1,800,000
Proceeds - notes payable . . . . . . . . . . . . . . . . . 1,000,000
Payments - long-term debt and notes payable. . . . . . . . (539,000) (814,000)
Repayment of loans from officers and stockholders. . . . . (86,000) (78,000)
Proceeds - issuance of common stock - net. . . . . . . . . 570,000 25,000
-------------------- --------------------
Net cash provided by (used in) financing activities (55,000) 1,933,000
-------------------- --------------------
NET (DECREASE) INCREASE IN CASH . . . . . . . . . . . . . . . (35,000) 1,257,000
Cash at beginning of period . . . . . . . . . . . . . . . . . 1,781,000 524,000
-------------------- --------------------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . $ 1,746,000 $ 1,781,000
==================== ====================
Supplemental disclosures of cash flow information:
Cash paid for:
Interest . . . . . . . . . . . . . . . . . . . . . . . $ 396,000 $ 338,000
Income taxes . . . . . . . . . . . . . . . . . . . . . $ 835,000 $ 400,000
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
22
<PAGE>
<TABLE>
<CAPTION>
HI-TECH PHARMACAL CO., INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Additional Total
------------------------------ Paid in Retained Stockholders
Shares Amount Capital Earnings Equity
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance - April 30, 1994 ................. 4,428,000 $44,000 $8,527,000 $1,469,000 $10,040,000
Net income ............................... 1,731,000 1,731,000
Issuance - Acquisition Rose Labs.......... 50,000 0 287,000 287,000
Common stock received in repayment of
officers' loans (Note H).................. (136,000) (1,000) (816,000) (817,000)
Exercise of stock options................. 6,000 0 25,000 25,000
------------- ------------- ------------- ------------- -------------
Balance - April 30, 1995 ................. 4,348,000 $43,000 8,023,000 3,200,000 11,266,000
Net income ............................... 1,335,000 1,335,000
Exercise of stock warrants................ 119,000 1,000 546,000 547,000
Exercise of stock options................. 5,000 1,000 22,000 23,000
------------- ------------- ------------- ------------- -------------
Balance - April 30, 1996 ................. 4,472,000 $45,000 $8,591,000 $4,535,000 $13,171,000
============= ============= ============= ============= =============
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
23
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1996 and 1995
(NOTE A) - The Company and Summary of Significant Accounting Policies:
- ---------------------------------------------------------------------
[1] Business:
--------
Hi-Tech Pharmacal Co., Inc. manufactures and sells prescription and
over-the-counter generic drugs, in liquid and semi-solid dosage forms. The
Company markets its products in the United States through distributors, retail
drug and mass-merchandise chains and mail order companies.
[2] Principles of Consolidation:
---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Rose Laboratories Inc. In consolidation, all
significant intercompany transactions and balances have been eliminated.
[3] Inventory:
---------
Inventories are valued at the lower of cost (first-in first-out or average cost)
or market.
[4] Property and equipment:
----------------------
Property and equipment is stated at cost. Depreciation and amortization of the
respective assets is computed using the straight-line method over their
estimated useful lives.
[5] Income taxes:
------------
Provision for income taxes is based on income and expenses reported in the
financial statements. Deferred income taxes result from temporary differences in
reporting certain income and expense items for financial and tax purposes. The
Company uses the liability method to account for deferred income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") 109.
[6] Revenue recognition:
-------------------
Sales are recorded as products are shipped. Estimated sales returns and
discounts are provided for. Contract research income is recognized as work is
completed and as billable costs are incurred. In some cases, contract research
income is based on attainment of certain designated milestones.
(continued)
24
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE A) - The Company and Summary of Significant Accounting Policies:
- ---------------------------------------------------------------------
(continued)
[7] Cash and cash equivalents:
-------------------------
The Company considers U.S. Treasury bills and Commercial Paper with a maturity
of three months or less when purchased to be cash equivalents.
[8] Net income per share:
--------------------
Net income per share is computed based on the weighted average number of common
shares and equivalents outstanding for each period. The effect of outstanding
options and warrants is computed, if dilutive, using the "treasury stock"
method.
[9] Recently issued accounting pronouncements:
-----------------------------------------
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 is effective for the Company's fiscal year commencing May 1, 1996.
The Company believes adoption of SFAS No. 121 will not have a material impact on
its financial statements.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation" which is effective for the Company's
fiscal year commencing May 1, 1996. SFAS No. 123 allows companies to either
account for stock-based compensation under the new provisions of SFAS No. 123
or under the provisions of APB No. 25, but requires pro forma disclosure in the
footnotes to the financial statements as if the measurement provisions of SFAS
No. 123 had been adopted. At this time, the Company intends to continue
accounting for its stock-based compensation in accordance with the provisions of
APB No. 25.
[10] Use of estimates:
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
(continued)
25
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note B) - Acquisition:
- ----------------------
In November 1994 the Company, through its wholly owned subsidiary, acquired Dr
Rose, Inc. dba Rose Laboratories ("Rose"), a manufacturer of suppositories,
creams and lotions. The acquisition price was 50,000 shares of common stock
which had an approximate fair value of $346,000, plus contingent shares, if
required, if the average closing price for the common stock, two years from the
acquisition date is less than $10 per share. The operations of Rose during the
fiscal year ended April 30, 1995 were not material when compared to the
Company's operations. The operating results of this acquisition are included in
the Company's results of operations from the date of acquisition. The
acquisition was accounted for by the purchase method of accounting. The cost of
the acquisition was allocated as follows:
Cash...................................... $ 7,000
Accounts receivable....................... 35,000
Inventories............................... 176,000
Plant and equipment....................... 171,000
Other assets.............................. 1,000
---------
Total assets.............................. 390,000
Accounts payable and accrued expenses..... (44,000)
---------
Fair value of stock issued (including
costs of $59,000)......................... $346,000
=========
(NOTE C) - Inventory:
- --------------------
The components of inventory consist of the following:
April 30,
-------------------------
1996 1995
----------- ------------
Finished goods and
work in process................................ $1,266,000 1,114,000
Raw materials ................................. 2,380,000 1,727,000
----------- ------------
T o t a l ..................................... $3,646,000 2,841,000
=========== ============
(continued)
26
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE D) - Property and Equipment:
- ---------------------------------
The components of net property and equipment consist of the following:
April 30,
-------------------------
1996 1995
----------- ------------
Land and building and improvements............. $ 4,342,000 4,238,000
Machinery and equipment........................ 8,751,000 4,290,000
Transportation equipment....................... 13,000 13,000
Computer equipment............................. 305,000 194,000
Furniture and fixtures......................... 96,000 88,000
----------- ------------
13,507,000 8,823,000
Accumulated depreciation and amortization...... 2,909,000 2,068,000
----------- ------------
10,598,000 6,755,000
Construction in progress....................... - 3,358,000
----------- ------------
Total property and equipment................... $10,598,000 10,113,000
=========== ============
Total interest incurred for the years ended April 30, 1996 and 1995 aggregated
$396,000 and $357,000, respectively. Of these amounts $247,000 and $200,000,
respectively, have been capitalized.
(NOTE E) - Customer Deposits and Contract Research Income:
- ---------------------------------------------------------
Contract research income is recognized as work is completed and as billable
costs are incurred. In some cases, contract research income is based on
attainment of certain designated milestones. Advance payments may be received to
fund certain development costs.
In April 1996, the Company entered into such agreements with aggregate
development payments of $400,000 and as of April 30, 1996 had received payments
of $200,000.
In March 1993 the Company agreed to develop and market with Circa Pharmaceutical
Inc. ("Circa"), four generic prescription products following FDA approval. Circa
will contribute $1,200,000 as reimbursement of the Company's development costs.
A payment of $200,000 was made upon execution of the agreement and the balance
will be paid as certain milestones are reached.
(continued)
27
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE F) - Note Payable - Bank:
- ------------------------------
The Company has a working capital credit line of $2,000,000 bearing interest at
the bank's prime rate (8.25% at April 30, 1996). The Company's outstanding
balance was $815,000 at April 30, 1996. Borrowings under the line are limited to
80% of eligible receivables and are collateralized by inventory, accounts
receivable and all other assets. The agreement contains covenants with respect
to working capital, net worth and certain ratios, as well as other covenants and
prohibits the payment of cash dividends.
(NOTE G) - Long-Term Debt:
- -------------------------
Long-term debt consists of the following: April 30,
-------------------------
1996 1995
----------- ------------
Equipment loans - collateralized by the related
equipment purchased, inventory, and accounts
receivable and other assets (1) .............. $ 173,000 266,000
Note payable - stockholder (2)................ 62,000 147,000
Mortgage payable (3).......................... 294,000 331,000
Mortgage payable (4).......................... 677,000 769,000
Mortgage payable (5).......................... 385,000 445,000
Equipment loan - collateralized by the related
equipment purchased, inventory, and accounts
receivable and other assets (6) .............. 1,435,000 1,693,000
----------- ------------
T o t a l 3,026,000 3,651,000
Less current portion.......................... 599,000 625,000
----------- ------------
Long-term debt.............................. $2,427,000 3,026,000
=========== ============
(continued)
28
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE G) - Long-Term Debt: (continued)
- -------------------------
[1] The equipment loans bear interest at fixed rates ranging from 6.95% to 13%
per annum. Such loans are payable in monthly installments ranging from $200 to
$7,500, plus interest, expiring through March 1998.
[2] The note payable to the stockholder is payable in monthly installments of
$8,000 through December 1996. Interest on the note payable has been imputed at
9.5% per annum. As at April 30, 1996, the discounted amount of the note is
$62,000 (face value $64,000).
[3] The mortgage is payable in monthly installments of $3,125 plus interest to
January 2004 at the rate of 1/2% over the bank's prime, 8.25% at April 30, 1996.
[4] The mortgage is payable in monthly installments of approximately $8,000 and
interest at a varying rate of 1/2% above the bank's prime rate, 8.25% at April
30, 1996.
[5] The mortgage is payable in monthly installments of $5,000 plus interest at
8.26% per annum through September 2002.
[6] As of October 31, 1994 the Company executed a new $1,800,000 term loan for a
seven-year period at an interest rate 1/2% above the bank's prime lending rate,
8.25% at April 30, 1996. The loan requires monthly payments of principal in the
amount of $21,429 plus interest.
Long-term debt is payable as follows:
1997............................................... $ 599,000
1998............................................... 529,000
1999............................................... 447,000
2000............................................... 447,000
2001............................................... 447,000
Thereafter......................................... 557,000
----------
T o t a l ......................................... $3,026,000
==========
(continued)
29
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE H) - Related Party Transactions:
- -------------------------------------
The Company has employment agreements expiring April 30, 2000 with the Chief
Executive Officer and the Chief Operating Officer, who are also stockholders of
the Company, which provide for aggregate annual base salaries of $186,000, as
amended, for the year ended April 30, 1996 plus annual cost of living increases
thereafter. Commencing on the sixth year, August 1, 1997, of the employment
agreement, each of the salaries will be increased by $50,000.
On July 18, 1994 the Company lent to each executive who had been granted 150,000
shares of the Company's common stock $387,500 for the purposes of paying their
income taxes. On April 12, 1995 these loans plus interest were repaid with
136,190 common shares of the Company's stock.
The Company leases an approximately 17,000 square foot facility in Madison,
Connecticut under a lease expiring on May 2, 1996. The current annual base rate
for such premises is $48,000. The landlord of such facility is comprised of the
former principal shareholders of Rose.
(NOTE I) - Commitments and Contingencies:
- ----------------------------------------
[1] Government regulation:
---------------------
The Company's products and facilities are subject to regulation by number of
Federal and State governmental agencies. The FDA, in particular, maintains
oversight of the formulation, manufacture, distribution, packaging and labeling
of all of the Company's products.
[2] Employment agreements:
---------------------
The Company has a three year employment agreement with an employee which
provides for an annual salary of $95,000 plus annual cost of living increases,
which expires in August 1998.
See Note H for other employment agreements.
[3] Other matters:
-------------
The Company is subject to various regulatory requirements in the normal course
of its business. Pending regulatory matters are not expected to have a material
effect on the Company's financial condition.
[4] Litigation:
----------
The Company is a party to an action commenced by a shareholder in November 1994
which makes certain allegations against the Company and the President of the
Company. The Company believes that the action is without merit.
In June 1995, an underwriter filed suit in Supreme Court of the State of New
York for breach of contract with regard to a proposed secondary public offering
of the Company's common stock. The damages claimed are not material to the
operations of the Company.
The Company is not a party to any other material litigation.
(continued)
30
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE J) - Fair Value of Financial Instruments:
- ----------------------------------------------
The carrying amounts of certain financial instruments such as cash and
equivalents, accounts receivable, accounts payable, short-term borrowings and
long-term debt approximate their fair values. The fair value of the long-term
debt is estimated using discounted cash flow analysis and the Company's current
incremental borrowing rates for similar types of arrangements.
(NOTE K) - Income Taxes:
- -----------------------
[1] The provision for income taxes is composed of the following:
Year Ended April 30,
-------------------------
1996 1995
----------- ------------
Current:
Federal..................................... $670,000 301,000
State ...................................... 95,000 (3,000)
Deferred:
Federal .................................... 90,000 658,000
State ...................................... 16,000 116,000
----------- ------------
T o t a l...................................... $871,000 $1,072,000
=========== ============
[2] Expected tax expense based on the statutory rate is reconciled with actual
tax expense as follows:
Year Ended April 30,
-------------------------
1996 1995
----------- ------------
Statutory rate................................. 34.0% 34.0%
State income tax, net of federal income tax benefit 5.0% 4.0%
Other.......................................... 0.4% 0.2%
----------- ------------
Effective tax rate............................. 39.4% 38.2%
=========== ============
(continued)
31
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE K) - Income Taxes: (continued)
- -----------------------
[3] Deferred tax expense is composed of the following:
April 30,
-------------------------
1996 1995
----------- ------------
Employee compensation - restricted common stock $ - 820,000
Depreciation and amortization.................. 122,000 (27,000)
Other, net .................................... (16,000) (19,000)
----------- ------------
$106,000 774,000
=========== ============
[4] The Company's income tax returns for the fiscal years 1993 and 1994 have
been audited by the Internal Revenue Service with no material change.
[5] Deferred tax liability at April 30, 1996 and 1995 consist of temporary
differences in the deductibility of depreciation and allowance for bad debts.
(NOTE L) - Common Stock:
- -----------------------
[1] Stock Option Plan:
-----------------
The Company's 1992 Stock Option Plan (the "Plan") provides for the issuance of
either incentive stock options or nonqualified options, the maximum number of
shares of common stock for which options may be granted is 675,000 shares. All
stock options granted are exercisable at a price determined by the stock option
committee of the plan. However, Incentive Stock Options, ("ISOs") as defined by
the Internal Revenue Code, must not be less than the fair market value of the
stock, at the date of grant. All options are exercisable in installments
commencing one year from date of grant and must be exercised within ten years of
date of grant, except for ISOs granted to persons owning more than 10% of the
Company's common stock which must be exercised within five years of the date of
the grant.
(continued)
32
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE L) - Common Stock: (continued)
- -----------------------
[1] Stock Option Plan: (continued)
-----------------
A summary of incentive stock option transactions is as follows:
Option Number of
Number of Price Shares
Shares Per Share Exercisable
----------- ----------- -------------
Outstanding at April 30, 1994.... 257,475 $ 4.00 - 86,681
10.125
=============
Granted.......................... 84,900 $ 5.250
Cancelled........................ (17,400) $ 4.00 -
10.125
Exercised........................ (6,225) $ 4.000
----------- ----------- -------------
Outstanding at April 30, 1995.... 318,750 $ 4.00 - 171,560
10.125 =============
Granted.......................... 92,700 $ 6.625 -
7.30
Cancelled........................ (1,000) $ 4.00 -
5.250
Exercised........................ (5,600) $ 4.00 -
10.125
----------- ----------- -------------
Outstanding at April 30, 1996.... 404,850 $ 4.00 - 220,913
10.125
=========== =========== =============
As of April 30, 1996, 255,550 shares were available for future grant under the
Plan.
[2] 1994 Director's Stock Option Plan:
---------------------------------
In August 1994 the Company adopted the 1994 Directors Stock Option Plan and
reserved 100,000 shares of common stock for issuance thereunder. The plan
provides for the annual grant of options to purchase 3,000 shares of common
stock (plus 500 additional shares for committee chairpersons) to nonemployee
directors at fair market value at the date of grant. As of April 30, 1996, there
were outstanding options to purchase 16,000 shares of common stock at an
exercise price of $6.75-$7.625.
[3] Warrants:
--------
The Company has outstanding warrants to purchase 61,000 shares of common stock
for $4.60 per share through August 1997.
(NOTE M) - Significant Customers:
- --------------------------------
Two major customers accounted for net sales of approximately 21% and 16% for the
year ended April 30, 1996 and 23% and 10% for the year end April 30, 1995,
respectively. These two customers represented approximately 38% of the
outstanding trade receivables at April 30, 1996.
(continued)
33
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE N) - Savings Plan:
- -----------------------
The Company has a defined contribution plan that qualifies under Section 401(k)
of the Internal Revenue Code for the benefit of substantially all full-time,
eligible employees. Employees may contribute between 1% and 15% of their salary
up to the dollar maximum allowed by the Internal Revenue Service. Company
contributions are voluntary and are made at the discretion of the Board of
Directors. The Company expensed $35,000 and $0 respectively for fiscal years
1996 and 1995.
(NOTE O) - Events (Unaudited) Subsequent to date of Independent Auditor's
Report:
- -------------------------------------------------------------------------
On July 18, 1996, the Company executed a lease for a 50,000 square foot building
in Amityville, New York. The leases commences August 1, 1996 and expires January
31, 2003. The initial annual base rent is $157,000 and is payable in monthly
installments of $13,125. The Company is responsible for all operating costs of
this facility and has the option to purchase the premises at the end of the
lease for $1,300,000.
34
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
The selected financial data presented below for the five years ended April 30, 1995 are derived from the audited financial
statements of the Company. This data is qualified in its entirety by reference to, and should be read in conjunction with,
Management's Discussion and Analysis of Financial Condition and Results of Operations and the Company's financial statements and
related notes thereto included elsewhere herein.
Year Ended April 30,
-------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales ..................... $19,140,000 $16,406,000 $13,297,000 $10,664,000 $ 7,452,000
--------------- --------------- --------------- --------------- ---------------
Costs and expenses:
Costs of goods sold............ 11,785,000 9,691,000 7,708,000 6,199,000 4,671,000
Research and development....... 933,000 711,000 646,000 374,000 123,000
Selling, general and
administrative............... 4,601,000 3,419,000 3,205,000 2,325,000 1,365,000
Contract research (income)..... (467,000) (293,000) (253,000) - -
Nonrecurring compensation
charge....................... - - 2,925,000 - -
Abandoned merger expense....... - - 193,000 - -
Interest expense............... 149,000 157,000 25,000 22,000 128,000
Interest (income) and other.... (67,000) (82,000) (52,000) (88,000) (2,000)
--------------- --------------- --------------- --------------- ---------------
16,934,000 13,603,000 14,397,000 8,832,000 6,285,000
--------------- --------------- --------------- --------------- ---------------
Income (loss) before provision
for income taxes............... 2,206,000 2,803,000 (1,100,000) 1,832,000 1,167,000
Provision for income taxes........ 871,000 1,072,000 (100,000) 679,000 446,000
--------------- --------------- --------------- --------------- ---------------
Net income (loss)................. $ 1,335,000 $ 1,731,000 $(1,000,000) $ 1,153,000 $ 721,000
=============== =============== =============== =============== ===============
Net income (loss) per common
share (1) ..................... $ 0.29 $ 0.38 $ (0.24) $ 0.31 $ 0.30
=============== =============== =============== =============== ===============
Weighted average number of
shares outstanding (1)....... 4,664,000 4,579,000 4,213,000 3,675,000 2,400,000
=============== =============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
April 30,
-------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Working capital ............... $ 5,164,000 $ 4,241,000 $ 2,826,000 $ 752,000 $ 751,000
Total assets.................. $20,234,000 $18,404,000 $15,239,000 $ 3,739,000 $ 2,913,000
Long-term debt................ $ 2,427,000 $ 3,026,000 $ 1,955,000 $ 595,000 $ 424,000
Stockholders' equity.......... $13,171,000 $11,266,000 $10,040,000 $ 1,397,000 $ 1,175,000
<FN>
(1) Reflects the 3-for-2 stock split payable on
November 1, 1993.
</FN>
</TABLE>
35
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
NONE
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT.
The Board of Directors consists of five members. All Directors
are elected at each Annual Meeting of Shareholders and hold office until the
next Annual Meeting of Shareholders when their respective successors are duly
elected and qualified.
Set forth below is the name and age of each Director, his
position with the Company and his principal occupation during the past five
years and the year in which each Director was first elected as a Director of the
Company.
36
<PAGE>
Elected
Principal Occupation to the
Name of Director and other Directorships Age Board
- ---------------- ------------------------------------------ --- -------
Bernard Seltzer Bernard Seltzer has been Chairman, 72 1983
Chief Executive Officer and President of
the Company since January 1990. From
May 1983 to January 1990, Mr. Seltzer
was Vice President of Sales of the
Company. Prior thereto, Mr. Seltzer was
the Vice President of Sales and
Marketing of Ketchum Laboratories, Inc.,
a pharmaceutical manufacturer and the
predecessor of the Company.
David S. Seltzer David S. Seltzer has been Executive Vice 36 1992
President-Administration since July 1992,
Vice President-Administration and Chief
Operating Officer of the Company since
March 1992 and a Director, Secretary
and Treasurer since February 1992.
From September 1986 to February 1990
Mr. Seltzer was employed as an account
executive. Mr. Seltzer received a B.A. in
Economics from Queens College in 1984.
David S. Seltzer is the son of Bernard
Seltzer.
Reuben Seltzer Reuben Seltzer has been a Director of 40 1992
the Company since April 1992. Mr. Seltzer
is president of R.M. Realty Services Inc.,
a real estate investment and company and
since May 1988 a Vice President of Rabco
Development Inc., a real estate development
company. From May 1983 to May 1988
Mr. Seltzer was a vice president and
attorney with Merrill Lynch Hubbard Inc.,
a real estate investment subsidiary of
Merrill Lynch and Company. Mr. Seltzer
received a B.A. in Economics from Queens
College in 1978, a Juris Doctor from the
Benjamin N. Cardozo School of Law in 1981
and a L.L.M. from the New York University
School of Law in 1987. Reuben Seltzer is the
son of Bernard Seltzer.
37
<PAGE>
Elected
Principal Occupation to the
Name of Director and other Directorships Age Board
- ---------------- ------------------------------------------ --- -------
Martin M. Goldwyn Martin M. Goldwyn was elected a Director 44 1992
of the Company in May 1992. Mr. Goldwyn
is a member in the law firm of Tashlik,
Kreutzer & Goldwyn P.C. Mr. Goldwyn
received a B.A. in finance from New York
University in 1974 and a Juris Doctor
from New York Law School in 1977.
Yashar Hirshaut, Yashar Hirshaut has been a Director of 58 1992
M.D. the Company since September 1992.
Dr. Hirshaut is a practicing medical
oncologist. He is president of Immuno-
Sciences Inc., a biopharmaceutical Company
engaged in the production of immuno-
therapeutic products used in the treatment
of cancer since August 1988. Since July
1986, he has been a Research Professor of
Biology at Yeshiva University. In addition,
he has served as editor-in-chief of the
Professional Journal of Cancer Investigation
since July 1981. Dr. Hirshaut received a
B.A. from Yeshiva University in 1959 and his
medical degree from Albert Einstein College
of Medicine in 1963.
38
<PAGE>
Executive Officers
The executive officers of the Company are set forth in the
table below. All executive officers are elected at the annual meeting or interim
meetings of the Board of Directors. No arrangements or understanding exists
between any executive officer and any other person pursuant to which he was
elected as an executive officer.
Name Age Position and Period Served
- ------------------- ------- ----------------------------------------
Bernard Seltzer 72 Chairman, Chief Executive Officer and
President of the Company since January 1990.
David S. Seltzer 36 Executive Vice President-Administration since
July 1992, Vice President-Administration and
Chief Operating Officer of the Company since
March 1992 and a Director, Secretary and
Treasurer since February 1992.
Elan Bar-Giora 52 Executive Vice President-Operations of the
Company since July 1992 and Vice President-
Operations of the Company since August 1990.
Arthur S. Goldberg 54 Vice President-Finance and Chief Financial
Officer of the Company since September 1991.
Significant Employees
Name Age Position and Period Served
- ------------------- ------- ----------------------------------------
Gennaro P. Caccavale 49 Director of Operations since February 1992.
Michael McConnell 38 Director of Product Development since
January 1992.
Gary M. April 39 Divisional Vice President of Sales since
January 1993.
Yih Ming Hsiao 56 Director of Special Projects since
January 1993.
Suzanne Fenton 41 Director of Compliance since September 1995.
Jesse Kirsh 37 Director of Quality Assurance since March
1994.
39
<PAGE>
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's Directors and Executive Officers and persons who own more than ten
percent of a registered class of the Company's equity securities to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of the
Company. Officers, Directors and greater than ten percent shareholders are
required by Securities and Exchange Commission regulation to furnish the Company
with copies of all Section 16(a) forms they file. The Company believes that all
Section 16(a) filing requirements were met during Fiscal 1996. In making this
statement, the Company has relied on the written representations of its
incumbent Directors and officers and copies of the reports that they have filed
with the Securities and Exchange Commission and Nasdaq.
40
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table shows, for the fiscal years ended April
30, 1996, 1995 and 1994, the compensation paid or accrued by the Company to or
for each of the executive officers of the Company.
<TABLE>
<CAPTION>
I. SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
---------------------------------------------------- ------------------
Awards
------------------
Other Annual All Other
Name and Principal Salary Bonus Compensation Compensation
Position Year ($) ($) (1) ($) Options (#) (2) (3) ($)
- ------------------ ---- ------- ------- ------------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Bernard Seltzer 1996 186,000 20,000 -- -0- 3,408
President, Chief 1995 210,000 30,000 -- -0- 2,912
Executive Officer 1994 200,000 25,550 1,462,500(4) -0- 2,430
David S. Seltzer 1996 186,000 25,000 -- 37,500 1,040
Executive Vice 1995 136,500 30,000 -- 37,500 2,231
President- 1994 130,000 25,550 1,462,500(4) 37,500 -0-
Administration,
Chief Operating
Officer, Secretary
and Treasurer
Elan Bar-Giora 1996 100,000 0 -- 10,000 -0-
Executive Vice 1995 100,000 2,500 -- 5,000 1,090
President- 1994 100,000 18,305 -- 7,500 -0-
Operations
- --------------------
<FN>
(1) The named executive officers received various perquisites, the cost of
which did not exceed the lesser of $50,000 or 10% of annual salary plus
bonus.
(2) Adjusted to reflect a 3-for-2 stock split declared on November 1, 1993.
(3) Represents the dollar value of the premium paid by the Company during
the fiscal years ended April 30, 1996, 1995 and 1994 with respect to
term life insurance for the benefit of the named executive officer.
(4) Represents the closing market price of 150,000 performance shares
granted to the executive as of January 14, 1994.
</FN>
</TABLE>
41
<PAGE>
Stock Options
The following table contains information concerning the grant of stock
options under the Company's Amended and Restated Stock Option Plan ("Plan") to
the named executive officers of the Company during Fiscal Year 1996.
<TABLE>
<CAPTION>
II. OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
- --------------------------------------------------------------------------------
Number of
Securities % of Total
Underlying Options Granted
Options Granted to Employees in Exercise Price Expiration
Name (#)(1)(2) Fiscal Year ($/Sh) Date
- ---------------- --------------- --------------- -------------- ----------
<S> <C> <C> <C> <C>
Bernard Seltzer -0- -0- -0- -0-
David S. Seltzer 37,500 40.5% 7.30 1/30/06
Elan Bar-Giora 10,000 9.5% 6.625 1/30/06
- --------------------
<FN>
(1) Options granted in Fiscal Year 1996 are scheduled to vest and become
exercisable in yearly increments of 25% beginning on January 31, 1997,
with full vesting occurring on January 31, 2000. Options expire ten
years after grant under the terms of the Company's Plan.
(2) Granted January 31, 1996.
</FN>
</TABLE>
42
<PAGE>
Option Exercises And Holdings
The following table sets forth information with respect to the
named executives concerning the exercise of options during Fiscal Year 1996 and
unexercised options held as of the end of Fiscal Year 1996.
<TABLE>
<CAPTION>
III. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of
Securities
Underlying Value of Unexercised
Unexercised In-the-Money Options
Options at Fiscal at Fiscal Year-End
Year-End (#)(1) ($)(2)
--------------------- --------------------------
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable
- --------------------- -------------------- -------------------- --------------------- --------------------------
<S> <C> <C> <C> <C>
Bernard Seltzer -0- -0- 0/0 0/0
David S. Seltzer -0- -0- 65,625 / 84,375 145,219 / 178,594
Elan Bar-Giora -0- -0- 29,625 / 23,125 91,700 / 49,888
- --------------------
<FN>
(1) Adjusted to reflect a 3-for-2 stock split declared on November 1, 1993.
(2) Amounts reflect the market value of the underlying shares of Common
Stock on April 30, 1996 less the exercise price.
</FN>
</TABLE>
Employment Contracts and Termination of Employment
Bernard Seltzer and David S. Seltzer serve as President and
Chief Executive Officer and Executive Vice President-Administration, Chief
Operating Officer, Secretary and Treasurer, respectively, of the Company
pursuant to employment agreements, effective as of May 1, 1992 and expiring
April 30, 2000, pursuant to which they have agreed to serve in their respective
capacities. Such employment agreements were modified to provide that the annual
base salary for each of Bernard Seltzer and David Seltzer would be $186,000 for
the fiscal year commencing May 1, 1995 through April 30, 1996. The increase in
annual base salary for each fiscal year thereafter for Bernard Seltzer and David
S. Seltzer is determined by multiplying their respective annual base salary for
the prior fiscal year by the greater of 5% or the increase in the Consumer Price
Index as of May 1 of each such year over the index as of May 1 of the prior
year. Commencing on the sixth year of the employment agreement, each of the
salaries of Bernard Seltzer and David S. Seltzer will be increased by $50,000.
43
<PAGE>
The Board of Directors in its discretion will determine the annual bonus, if
any, to be received by Bernard Seltzer and David S. Seltzer. The employment
agreements also contain standard confidentiality provisions and a non-compete
provision for a term of one year after the termination of their employment.
Under the employment agreements for each of Bernard Seltzer
and David S. Seltzer, the Company will pay to each person's estate upon his
death, his base salary for a period of twelve (12) months after the end of the
month in which death occurred. In the event of total disability, each will
continue to receive his base salary for the remaining term of his employment
agreement. In addition to base salary, Bernard Seltzer and David S. Seltzer each
will be paid an amount equal to a percentage of the bonus, if any, based on the
portion of such year in which death, total disability or termination of
employment occurred. If termination is for cause, total disability or because he
wrongfully leaves his employment, then, upon such occurrence, the employment
agreement shall be deemed terminated and the Company shall be released from all
obligations.
Arthur S. Goldberg serves as Vice President-Finance and Chief
Financial Officer of the Company pursuant to a three year employment agreement
ending on August 3, 1998. Mr. Goldberg's annual base salary is $85,000 for the
period commencing on August 4, 1995 through August 3, 1998. Such annual salary
shall be adjusted annually, commencing September 1, 1996, by the annual change
in the Consumer Price Index or an agreed upon substitute but no less than 5% per
annum. The Board of Directors in its discretion will determine the annual bonus,
if any, to be received by Mr. Goldberg. Such employment agreement contains
standard confidentiality provisions.
Director Compensation
For their service on the Board, the Company pays each Director
a fee of $300 per meeting. Each member of the Board is reimbursed for expenses
incurred in connection with each Board or Committee meeting attended.
Stock Option Plans
The Amended and Restated Stock Option Plan (the "Plan")
The Company's Amended and Restated Stock Option Plan provides
for a total of 675,000 shares of Common Stock authorized to be granted under
such Plan. During Fiscal 1996, the Company granted options to purchase 92,700
shares of Common Stock at an exercise price of $6.625 having exercise dates
ranging from January 1997 to December 2006. During Fiscal 1996, 6,600 options
were exercised or expired, and 255,550 shares are available for future grant
under such Plan. The Company's Plan provides for the grant of options to its key
44
<PAGE>
employees and directors in order to give such employees a greater personal
interest in the success of the Company and an added incentive to continue and
advance in their employment. The Company's Plan provides for a fifteen year
expiration period for non-statutory options and ten years for incentive stock
options granted thereunder and allows for the exercise of options by delivery by
the optionee of previously owned Common Stock of the Company having a fair
market value equal to the option price, or by a combination of cash and Common
Stock.
As of July 22, 1996, the Company has granted options to
purchase 150,000 shares to David S. Seltzer and 52,500 shares to Elan Bar-Giora
at an average exercise price of $5.71 per share.
The Plan is administered by the Stock Option Committee of the
Board of Directors. The Committee has broad discretion in determining the
recipients of options and numerous other terms and conditions of the options.
The exercise price for shares purchased upon the exercise of
non-statutory options granted under the Plan is determined by the Stock Option
Committee as of the date of the grant.
The exercise price of an incentive stock option must be at
least equal to the fair market value of the Common Stock on the date such option
is granted (110% of the fair market value for shareholders who, at the time the
option is granted, own more than 10% of the total combined classes of stock of
the Company or any subsidiary). No employees may be granted incentive stock
options in any year for shares having a fair market value, determined as of the
date of grant, in excess of $100,000.
No incentive option may have a term of more than ten years (in
the case of incentive stock options, five years for shareholders holding 10% or
more of the Common Stock of the Company). Options generally may be exercised
only if the option holder remains continuously associated with the Company or a
subsidiary from the date of grant to the date of exercise. However, options may
be exercised upon termination of employment or upon the death or disability of
any employee within certain specified periods.
Directors Plan
The Company's 1994 Directors Stock Option Plan ("Directors
Plan") provides for a total of 100,000 shares of Common Stock authorized to be
granted under the Directors Plan. Through July 22, 1996, the Company has granted
non-statutory options to purchase 5,000 shares to each of two directors and
6,000 shares to one director at an average exercise price of $7.19 per share.
45
<PAGE>
The Directors Plan provides for the automatic annual grant of
options to non-employee directors and is administered by the Board of Directors.
Each non-employee director will be automatically granted 3,000 shares of Common
Stock on the date of each annual meeting of the Company's shareholders. A
non-employee director who chairs the audit or other committees of the Board of
Directors will be automatically granted annually an option to purchase an
additional 500 shares of Common Stock.
To remain eligible, a non-employee director must continue to
be a member of the Board of Directors. Each option granted is exercisable in
increments of 25% per year commencing on the first anniversary date of the date
of grant. The exercise price for all options may not be less than the fair
market value of the Common Stock on the date of grant. Options under the
Directors Plan have a term of 10 years and may be exercised for limited periods
after a person ceases to serve as a director.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table identifies each person known to the
Company to be the beneficial owner of more than five percent of the Company's
Common Stock, each director of the Company, and all directors and officers of
the Company as a group, and sets forth the number of shares of the outstanding
Common Stock beneficially owned by each such person and such group and the
percentage of the shares of the outstanding Common Stock owned by each such
person and such group. Except as noted below, the named person has sole voting
power and sole investment power over the securities.
Amount and Nature Percent of
of Beneficial Common
Name and Address of Beneficial Owner Ownership Stock
- -------------------------------------- ----------------- ------------
Bernard Seltzer....................... 920,968 (1) 20.6%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
David S. Seltzer...................... 522,107 (2)(3) 11.5%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
Reuben Seltzer........................ 305,474 (3)(4) 6.8%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
46
<PAGE>
Amount and Nature Percent of
of Beneficial Common
Name and Address of Beneficial Owner Ownership Stock
- -------------------------------------- ----------------- ------------
Arthur S. Goldberg...................... 30,750 (5) *
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
Elan Bar-Giora.......................... 38,750 (6) *
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
Martin M. Goldwyn........................ 10,750 (7) *
c/o Tashlik, Kreutzer & Goldwyn P.C.
833 Northern Boulevard
Great Neck, New York 11021
Yashar Hirshaut, M.D..................... 1,750 (8) --
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
All Directors and Executive Officers as
a group (7 persons)................. 1,830,549 (9) 39.4%
- ---------------------------
* Amount represents less than one percent of Common Stock.
(1) Amount does not include 60,000 shares of Common Stock owned by Mr.
Seltzer's wife, as to which Bernard Seltzer disclaims beneficial
ownership. Includes 600,000 shares of Common Stock owned by The Bernard
Seltzer Retained Annuity Trust, dated November 1, 1994 (the "Trust").
(2) Amount includes options to purchase 75,000 shares of Common Stock
exercisable within 60 days of July 22, 1996, and 37,256 shares of
Common Stock owned by Mr. Seltzer's wife and children.
(3) Does not include a contingent residuary interest in the Trust.
(4) Amount includes options to purchase 20,000 shares of Common Stock
exercisable within 60 days of July 22, 1996 and 33,028 shares of Common
Stock owned by Mr. Seltzer's wife and children.
(5) Amount represents options to purchase 30,750 shares of Common Stock
exercisable within 60 days of July 22, 1996.
(6) Amount represents options to purchase 38,750 shares of Common Stock
exercisable within 60 days of July 22, 1996.
47
<PAGE>
(7) Amount represents options to purchase 10,750 shares of Common Stock
exercisable within 60 days of July 22, 1996.
(8) Amount includes options to purchase 1,750 shares of Common Stock
exercisable within 60 days of July 22, 1996.
(9) Amount includes options to purchase 186,375 shares of Common Stock
exercisable within 60 days of July 22, 1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to an agreement made prior to the Company's initial
public offering in August 1992 and as amended, the Company granted to Bernard
Seltzer and David S. Seltzer the right to receive 300,000 shares of the
Company's common stock, under certain circumstances, including the closing price
of the Company's common stock exceeding two times the initial public offering
price for any consecutive ten day period between January 1, 1994 and April 30,
1995. Such condition was satisfied on January 14, 1994. Bernard Seltzer and
David S. Seltzer were each granted 150,000 shares on January 14, 1994. During
July 1994, the Company loaned to each of Bernard Seltzer and David S. Seltzer
the amount of $387,500 to pay their related income tax obligations in connection
with the grant of such shares. The loans were evidenced by demand promissory
notes, bearing a variable rate of interest at the prime rate established by the
Company's bank plus one-half of one percent, and were secured by the Company's
common stock.
As of April 12, 1995, Messrs. Bernard Seltzer and David S.
Seltzer each contributed back to the Company 68,095 shares of Common Stock at a
valuation per share equal to the market value on such date in repayment of the
loans by the Company to each of them.
The Company believes that material affiliated transactions and
loans between the Company and its directors, officers, principal shareholders or
any affiliates thereof have been, and will be in the future made on terms no
less favorable than could be obtained from unaffiliated third parties.
48
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Page Number
---------------
a) Exhibit Foot-
Number Description of Document Notes
- ----------- -------------------------------------------------------------- ---------------
<S> <C> <C>
3.1 Articles of Incorporation and By-Laws (1)
4.1 Warrant Certificate of Larry Silverstein (2)
4.2 Warrant Certificate of Caesar Fraschilla (3)
4.3 Warrant Certificate of Colman Abbe (4)
4.4 Warrant Certificate of Laidlaw Equities, Inc. (5)
4.5 Warrant Certificate of U.S. Equity Securities, Ltd. (6)
4.6 Agreement, dated June 2, 1993, by and between Bernard Seltzer
and the Company (7)
4.7 Agreement, dated June 2, 1993, by and between David S. Seltzer
and the Company (8)
4.8 Copy of Hi-Tech Pharmacal Co., Inc. Stock Option Plan (9)
4.9 Copy of Hi-Tech Pharmacal Co., Inc. Stock Option Agreement (10)
10.1 Employment Agreement with Bernard Seltzer (11)
10.2 Employment Agreement with David S. Seltzer (12)
10.3 Employment Agreement with Arthur S. Goldberg (13)
10.4 Agreement, dated June 2, 1993, by and between Bernard Seltzer
and the Company (14)
10.5 Agreement, dated June 2, 1993, by and between David S. Seltzer
and the Company (15)
10.7 Second Amendment to Revolving Credit Agreement with National
Westminster Bank USA, as amended (16)
10.8 Term Note to National Westminster Bank USA in the amount of
$250,000 dated August 22, 1990 (17)
10.10 Fixed Rate Term Note in the amount of $450,000 to National
Westminster Bank dated March 5, 1993 (18)
10.11 Mortgage between National Westminster Bank USA and the
Company dated September 1, 1992 (19)
10.12 Mortgage Note and Supplemental Mortgage and Mortgage
Spreader Consolidating Modification and Extension Agreement
Between the Company and National Westminster Bank dated
July 29, 1993 (20)
10.15 Agreement by and between Hi-Tech Pharmacal Co., Inc. and Circa
Pharmaceuticals, Inc. dated as of March 30, 1993 (21)
*11. Computation of Earnings per Common Share and Common Share
Equivalents for year ended April 30, 1996
*22. Subsidiaries of Hi-Tech Pharmacal Co., Inc.
- --------------------
* Filed herewith
<FN>
(1) Filed as Exhibit 1.3 to Hi-Tech Pharmacal Co., Inc. Registration
Statement on Form S-1 (No. 33-47860) and incorporated herein by
reference.
(2) Filed as Exhibit 4.1 to Hi-Tech Pharmacal Co., Inc. Annual Report on
Form 10-KSB for the fiscal year ended April 30, 1993 and incorporated
herein by reference.
(3) Filed as Exhibit 4.2 to Hi-Tech Pharmacal Co., Inc. Annual Report on
Form 10-KSB for fiscal year ended April 30, 1993 and incorporated
herein by reference.
</FN>
</TABLE>
49
<PAGE>
(4) Filed as Exhibit 4.3 to Hi-Tech Pharmacal Co., Inc. Annual Report on
Form 10-KSB for fiscal year ended April 30, 1993 and incorporated
herein by reference.
(5) Filed as Exhibit 4.4 to Hi-Tech Pharmacal Co., Inc. Annual Report on
Form 10-KSB for fiscal year ended April 30, 1993 and incorporated
herein by reference.
(6) Filed as Exhibit 4.5 to Hi-Tech Pharmacal Co., Inc. Annual Report on
Form 10-KSB for fiscal year ended April 30, 1993 and incorporated
herein by reference.
(7) Filed as Exhibit 4.6 to Hi-Tech Pharmacal Co., Inc. Annual Report on
Form 10-KSB for fiscal year ended April 30, 1993 and incorporated
herein by reference.
(8) Filed as Exhibit 4.7 to Hi-Tech Pharmacal Co., Inc. Annual Report on
Form 10-KSB for fiscal year ended April 30, 1993 and incorporated
herein by reference.
(9) Filed as Exhibit 10.1 to Hi-Tech Pharmacal Co., Inc. Registration
Statement on Form S-1 (No. 33-47860) and incorporated herein by
reference.
(10) Filed as Exhibit 10.2 to Hi-Tech Pharmacal Co., Inc. Registration
Statement on Form S-1 (No. 33-47860) and incorporated herein by
reference.
(11) Filed as Exhibit 10.3 to Hi-Tech Pharmacal Co., Inc. Pre-Effective
Amendment No. 1 to Registration Statement on Form S-1 (No. 33-47860)
and incorporated herein by reference.
(12) Filed as Exhibit 10.4 to Hi-Tech Pharmacal Co., Inc. Pre-Effective
Amendment No. 1 to Registration Statement on Form S-1 (No. 33-47860)
and incorporated herein by reference.
(13) Filed as Exhibit 10.5 to Hi-Tech Pharmacal Co., Inc. Pre-Effective
Amendment No. 1 to Registration Statement on Form S-1 (No. 33-47860)
and incorporated herein by reference.
(14) Filed as Exhibit 10.4 to Hi-Tech Pharmacal Co., Inc. Annual Report on
Form 10-KSB for fiscal year ended April 30, 1993 and incorporated
herein by reference.
(15) Filed as Exhibit 10.5 to Hi-Tech Pharmacal Co., Inc. Annual Report on
Form 10-KSB for fiscal year ended April 30, 1993 and incorporated
herein by reference.
(16) Filed as Exhibit to Hi-Tech Pharmacal Co., Inc. Quarterly Report on
Form 10-QSB for the quarterly period ended January 31, 1994 and
incorporated herein by reference.
(17) Filed as Exhibit 10.11 to Hi-Tech Pharmacal Co., Inc. Registration
Statement on Form S-1 (No. 33-47860) and incorporated herein by
reference.
(18) Filed as Exhibit to Hi-Tech Pharmacal Co., Inc. Quarterly Report on
Form 10-QSB for the quarterly period ended January 31, 1993 and
incorporated herein by reference.
(19) Filed as Exhibit to Hi-Tech Pharmacal Co., Inc. Quarterly Report on
Form 10-Q for the quarterly period ended July 31, 1992 and incorporated
herein by reference.
50
<PAGE>
(20) Filed as Exhibit to Hi-Tech Pharmacal Co., Inc. Quarterly Report on
Form 10-QSB for the quarterly period ended July 31, 1993 and
incorporated herein by reference.
(21) Filed as Exhibit 10.14 to Hi-Tech Pharmacal Co., Inc. Annual Report on
Form 10-KSB for fiscal year ended April 30, 1993 and incorporated
herein by reference. -------------------------
(b) No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
51
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: July 24, 1996
HI-TECH PHARMACAL CO., INC.
By: /s/ Bernard Seltzer
------------------------------
Bernard Seltzer,
Chairman of the Board,
Chief Executive Officer,
President
By: /s/ Arthur S. Goldberg
------------------------------
Arthur S. Goldberg
Chief Financial Officer
In accordance with the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
/s/ Bernard Seltzer
- ----------------------------------
Bernard Seltzer, Chairman July 24, 1996
of the Board, Chief Executive
Officer, President
/s/ David S. Seltzer
- ----------------------------------
David S. Seltzer, Director, July 24, 1996
Executive Vice President-
Administration, Treasurer,
Secretary, Chief Operating Officer
/s/ Reuben Seltzer
- ----------------------------------
Reuben Seltzer, Director July 24, 1996
/s/ Martin M. Goldwyn
- ----------------------------------
Martin M. Goldwyn, Director July 24, 1996
- ----------------------------------
Yashar Hirshaut, M.D., Director July ___, 1996
52
<PAGE>
EXHIBIT 11
<PAGE>
Hi-Tech Pharmacal Co., Inc. and Subsidiary
Computation of net income per common share
Exhibit 11
April 30,
-------------------------
1996 1995
-------------------------
Primary
-------
Net income......................................... $ 1,335,000 1,731,000
============ ============
Weighted average number of shares outstanding: 4,411,421 4,450,340
Shares issuable upon exercise of dilutive
stock options and warrants net of shares
assumed to be repurchased (at the average
market price for the period) from exercise
proceeds..................................... 238,274 121,204
Contingent shares - Dr. Rose acquisition..... 14,516 7,258
------------ ------------
Shares used for computation........................ 4,664,211 4,578,802
============ ============
Primary net income
per common share $ .29 .38
============ ============
Fully Diluted
-------------
Net income......................................... $ 1,335,000 1,731,000
============ ============
Weighted average number of
shares outstanding: 4,411,421 4,450,340
Shares issuable upon exercise of dilutive
stock options and warrants net of shares
assumed to be repurchased (at end market price
for the period) from exercise proceeds........ 242,939 121,204
Contingent shares - Dr. Rose acquisition...... 15,843 7,258
------------ ------------
Shares used for computation......................... 4,670,203 4,578,802
============ ============
Fully diluted net
income per common share (a) $ .29 .38
============ ============
(a) Not presented because dilution from primary net income per common share
amount is less than 3%.
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF HI-TECH
PHARMACAL CO., INC.
Dr Rose d/b/a Rose Laboratories, Inc.
<PAGE>
